Opinion: Why are Android Phones Pricier?

Here's one of those fascinating columns where the comments are just as intriguing as the original essay. Seth Weintraub over at Fortunemuses on Android smartphone pricing. The iPhone is never far from anyone's thoughts, either. So here's the premise, the conclusions, and the reactions, all in one go.

Google OS is free to manufacturers, because it's supported by ads. Google works on the OS, manufacturers design the Android phones (and some customized UIs). Apple iOS is part of the cost of the iPhone for now (don't worry, Apple just got ads, and ticked-off customers too), the design and manufacturing costs are all-Apple as well. And there's those 40% margins to keep.

So, the $640 question is: Why does an Android smartphone cost essentially the same as an iPhone?

I didn't pull $640 out of thin air as a play on the old $64K question. Android smartphones and iPhone all retail for about $200 or so at US carriers with a 2 year service contract. Obviously American carriers are subsidizing the phones with the Gillette razor-and-blades model: give away (subsidize) the razor (phone), and make the profit off the disposable blades (contracted monthly service costs). You can buy a smartphone with no contract and pay a retail price around $500-600 instead, but you still are usually limited to which carrier it would work with. With the iPhone, you still have to buy a contract with AT&T and it retails for $600.

Marketing smartphones is very different elsewhere. Many European countries don't allow phones to be locked to carriers, although phones can be subsidized when sold with call plans. In France, an iPhone 4 is â‚¬620 ($800). Canada has a similar situation, where you can buy the same phone at retail and choose a carrier by service cost only. But note that usually the stated phone prices include value-added tax or sales tax, unlike in the USA, so comparing $600 in the US with $800 in Europe doesn't completely cover the "value of no carrier lock."

Does AT&T's exclusive deal with Apple mean it is subsidizing more of the phone than the typical Android smartphone? And would the end of that deal, in 2011, mean the iPhone would cost less? Or would AT&T subsize more, or would Apple take the profit loss? Or does the cost of the phone go up with a new contract? Weintraub expects to see the iPhone climb to $250 or even $300 when that happens. But Apple can't be ignoring Android's increasing market share. And Verizon can afford a price-war with AT&T, so I'm not so sure I'd call a $300 iPhone just yet. Plus, the Android competition is headed in the other direction:

AT&T's Android smartphone offerings, ranging from $129 to $199 with service contract, have another competitor you may not have thought about. These prices are the same whether you buy the phone in an AT&T store or from their website. (Images from Fortune.)

Check out the prices when you buy the same phones from Amazon:

Same exact phones, much lower prices. Weintraub's got another image of Amazon pricing for Motorola Droid line, also cheaper than at Verizon. Compare T-Mobile's one day $99 special on the Samsung Vibrant to the cost at Amazon: free. How does Amazon make money giving away low-cost or even free Android phones? Simple. Amazon sells the phones with the same contract the carrier stores do. They make their money from the bounty paid to them by the carrier. The only difference to you is the early service termination penalty may have an additional fee to Amazon tacked on (the penalty is paid to Amazon Wireless). So if you buy a phone online, you better make sure you intend to keep it.

Weintraub concludes this means future Android phones will get less expensive. After all, why would anyone buy a phone from a carrier with these price differences? He sees future smartphones selling for lower cost and only one-year rather than two-year contracts. The end of iPhone exclusivity will mean its price won't be kept as artificially low, but at the same time Android devices can't stay as artificially high.